Are you hoping to become one of the roughly 27 million Americans who own their home outright?
While some of these homeowners were able to buy their properties in cash, most Americans have to take out a mortgage in order to finance the purchase.
If you sign on for a 30-year mortgage, though, that doesn’t mean you have to carry this debt with you for three decades. Of course, that also depends on the different kinds of mortgages. For example, some people say reverse mortgages are a scam, but you should always check with an expert.
Instead, you can pay off your mortgage early and unburden yourself from the annual interest. Here are 7 tips for paying your mortgage off so you can live debt-free much sooner.
1. Make Mortgage Payments Every Two Weeks
The average homeowner makes twelve mortgage payments every year. One of the most common tips for paying your mortgage off faster, however, is to pay half of your mortgage every two weeks. What ends up happening is that you make 26 half-sized payments each year, amounting to 13 full payments.
You’ll want to check in with your lender about the best way to do this. They might be able to set you up with this payment schedule or you might just choose to send the extra payments each month through the mail or online. Not all banks allow you to pay on a biweekly basis though so you might just have to pay more each month to get the equivalent results on your mortgage payoff.
2. Round Up Your Payments
If you’re wondering how to pay your mortgage off faster when you don’t have a ton of extra cash lying around, consider rounding up your payments. This means if your mortgage payment is $1,112, pay $1,120. Or you could even round up to $1,200.
This way, you’ll be paying down extra the principal of your loan without scraping the bottom of your pockets for change.
3. Make One Extra Payment a Year
If making payments every two weeks is too much of a hassle, consider making an extra payment each year. Whether at the beginning of the year or at the end, this can help you pay down your mortgage faster.
If it’s a bit much to shell out two-months worth of mortgage payments one month, you can also tack on the extra payment a little bit each month. This means dividing your monthly payment by 12 and adding this amount on each month.
4. Refinance Into a Shorter Loan
When you receive a shorter-term loan, the interest rates are often lower. This means that if you choose to go with a 15-year loan instead of a 30-year loan, you can end up saving quite a bit of money. But if you can afford to do so, when you refinance your mortgage in today’s market you’ll end of saving a lot of money in the long run.
This will mean, however, that your monthly mortgage payments will be higher. If you can stand to pay a little bit more every month, though, you can be rid of paying off your mortgage for good much sooner.
The other thing you can do is simply pretend that you refinanced your mortgage. Rather than going through all the trouble of refinancing to a 15-year loan if you already have a low interest rate, just increase your payments as if you have a 10 or 15 year term.
5. Pour All Your Extra Cash Into Your Mortgage
Some days you might find your pockets are a little heavier than others. When you have extra cash in your bank account, you can put it towards the principal of your loan.
If you receive bonuses, gifts, or an inheritance, consider putting this towards your mortgage.
Remember, though, putting all of your money into your mortgage might not be the best place for it. If you can be earning more money from your money through investing it than you would be saving by paying down your mortgage, this might not be the best avenue for you.
6. Try Out the One-Dollar-a-Month Plan
Though it doesn’t sound like much, the dollar a month plan can reduce the length of your mortgage by quite a bit. Say you have a $150,000 loan with a 6% fixed interest rate over 30 years, with a monthly mortgage payment of $900. With the dollar a month strategy, you can reduce the length of your mortgage by eight years.
This is a great strategy if you expect your income to increase slightly and consistently as the years go on.
The way it works is that each month, you will increase your mortgage payment by one dollar. This means if your mortgage is $900/month, that’s what you’ll pay month one. In the second month you’ll pay $901, the third $902, and so on for your mortgage.
7. Maximize Your Down Payment
Of course, buying a house with a huge down payment might not be for everybody. There are even several low down payment mortgages that might be the best option for a lot of people.
However, if you have the ability to put down a bigger down payment, your mortgage will be much easier to pay down early. This means that you will need to finance less money, and your mortgage payments will be more manageable and easier to overpay. Some people might buy their home entirely in cash, but that isn’t possible for a lot of homeowners.
If you can put down 10% rather than 5%, it can be a huge help. An even better option is to put down 20%, as it helps you avoid paying PMI (private mortgage insurance). PMI usually costs between .5% and 1% of the loan amount every year. That means on a $300,000 mortgage, each year you’ll owe $1,500 to $3,000 a year.
Paying Off Your Mortgage Early Works the Best When You Start Right Away
The thing about compound interest is that you’re paying the least amount towards the principal of the loan on your first payment. The sooner you start overpaying your mortgage towards the principal, the better chances you’ll have of knocking some years off of the length of your mortgage.
Did you find this article about paying off your mortgage early helpful? If so, be sure to check out the rest of our blog for more informative articles on mortgage management!